Comparing Private Student Loans: What Borrowers Should Know
Federal student loans have historically represented the largest share of student loan borrowing in the United States. However, recent federal policy changes under the One Big Beautiful Bill Act (OBBBA) have adjusted federal borrowing limits and repayment structures. As a result, some students and families may find that federal aid alone does not fully cover their educational costs and may consider private (also called alternative or third-party) student loans to bridge the gap.
Before pursuing private loans, all universities in the University of Illinois System strongly encourage students to fully explore federal student loans, scholarships, grants, and institutional resources. Guidance is available through university financial aid offices, including:
Regardless of loan type, students should understand and track their borrowing while in school. Tools such as our Know What You Owe web page can help borrowers make informed decisions about how to track and manage their federal, institutional, or private loans.
Private Lending Capital Is Limited
Unlike federal student loans, which are supported by the federal government, private student loans are issued by banks and other lenders using their own funds, or capital. Because of this, loan availability may be more limited and can change based on economic conditions and borrower demand.
If more students turn to private loans due to federal borrowing limits, borrowers may encounter:
- More stringent credit approval requirements
- Higher interest rates tied to market conditions
- A greater reliance on qualified co-signers
- Longer or more selective approval processes
This means potential private loan borrowers will want to plan in advance and build positive credit habits that can make their credit applications more competitive.
Why Credit History Matters
Most traditional-age college students (ages 18–24) have limited credit history, often referred to as a “thin credit file.” Even without missed payments, limited credit activity can affect approval odds and loan pricing. As a result, borrowers who have poor credit scores have sometimes found it easier to obtain loans compared to consumers with no credit history.
How Credit Affects Private Student Loans
Access
Private lenders usually review several factors when determining eligibility, including:
- Credit score
- Length and depth of credit history
- Debt-to-income ratio
- Employment, income, or co-signer creditworthiness
By contrast, most federal Direct Loans do not require a credit check. The federal Direct Parent PLUS and Grad PLUS loans both require a credit check. Currently, if you are denied a PLUS loan due to adverse credit, you still may be able to obtain a PLUS loan by obtaining an endorser or filing an appeal. If a parent is denied a Direct Parent PLUS Loan, their student may be able to get additional Unsubsidized Direct Loans. Always talk to your school's financial aid office about your options.
Cost
A borrower’s credit profile can influence:
- Approval (whether they obtain a loan or not)
- Interest rates (fixed or variable)
- Loan fees and capitalization policies
- Available repayment terms
Over time, differences in interest rates can significantly affect the total amount repaid. Even a minor difference in interest rates can produce very different total costs over the term of a loan. This is true of all types of loans, not just private education loans.
Minimizing Credit Impact When Comparing Loans
When applying for private student loans, multiple credit inquiries within a short time frame are typically treated as a single inquiry by credit scoring models. To minimize impacts on credit scores:
- Compare lenders within a 14 day application window
- Use prequalification tools that rely on soft credit checks when available
- Apply only to lenders you are seriously considering
How Private Student Loans May Affect Future Borrowing
Private student loans as well as federal student loans contribute to your overall debt-to-income (DTI) ratio, which lenders consider when evaluating applications for mortgages, auto loans, and other credit. Unlike federal loans, private loans generally have fixed monthly payments that cannot be adjusted based on income.
Federal repayment options, such as income-driven repayment plans, deferment, forbearance, or loan forgiveness programs, may reduce monthly payments for eligible borrowers. These protections are generally not available for private loans.
This means that your timeline for homeownership or other financial goals may be affected more significantly by holding private student loans than with federal student loans.
Repayment Terms: Federal vs. Private Loans
Federal and private student loans differ in important ways. Key distinctions include:
- Interest rates: Federal loan rates are set by Congress; private loan rates are set by lenders.
- Repayment flexibility: Federal loans offer standardized deferment and repayment options; private loan terms vary by lender.
- Forgiveness programs: Certain federal loans may qualify for forgiveness; private loans do not.
- Borrower protections: Federal loans include statutory consumer protections; private protections depend on contract terms* & state law.
*While contract terms are guided by federal legislation, they can vary significantly from lender-to-lender or even borrower-to-borrower for the same lender.
Questions to Ask Before Choosing a Private Loan
Before borrowing, students should consider the following questions:
- What are the requirements to qualify?
- Do I need a co-signer?
- Are there origination or application fees?
- Is the interest rate fixed or variable, and is there a maximum rate?
- When does interest begin accruing?
- When does repayment begin?
- Is in-school deferment automatic?
- Are co-signer release options available?
- What deferment, hardship, forbearance, or disability options exist?
Students are encouraged to review lender disclosures carefully before signing a private loan agreement.
Comparison Example
Below is a table comparing three fictional private student loans. Each loan has different features to compare and this snapshot doesn't consider every possible feature that each loan could offer.
Comparison of Fictional Private Student Loan Features| Feature | Lender A
Fixed Future Bank | Lender B
EduFlex Loans | Lender C
SmartLend |
|---|
| Interest Rate | Fixed: 7.5% | Variable: 5.5%
(can rise to 12%) | Fixed: 9.5% |
|---|
| Origination Fees | None | 2% of loan amount | 1% of loan amount |
|---|
| Repayment Term | 10 years | 15 years | 10 years |
|---|
| In-School Payments | Interest-only option available | Full deferment available | Full deferment allowed |
|---|
| Co-Signer Required? | Yes, unless 700+ credit score | Yes, required for all borrowers | No co-signer required |
|---|
| Co-Signer Release | After 24 on-time payments | No release option | After 36 on-time payments |
|---|
| Grace Period | 90 days after graduation or dropping below half-time | 6 months after leaving school or dropping below half-time | Up to 12 months after leaving school |
|---|
| Forbearance Option | Up to 12 months | Up to 24 months | No forbearance available |
|---|
Comparing Total Costs
One thing to consider with all types of loans is how much a longer repayment term increases the total cost of the loan. Below is a graph that shows the potential total cost of each of these loans if you started paying immediately. Because the EduFlex loan is variable, it's unclear how much it will cost for sure so a range has been mapped to show the lowest to highest possible total cost over the 15 year term.
Understanding Total Cost Over Time
The charts below illustrate the total costs of a $10,000 loan for each of the lenders compared in the table above. With this example, your repayment starts immediately after disbursement for simplification, but you would most likely have different balances when your repayment begins based on the deferment or forbearance delays available through your lender. The first chart shows total cost while the second shows how much you pay over time. These visualizations reveal important differences that aren't immediately obvious when comparing just interest rates and terms.
Lender A (Fixed Future Bank) offers the most straightforward and affordable option. With a 7.5% fixed rate and no origination fees, you'll pay a total of $14,245 over 10 years. Your monthly payments are predictable at $118.71 per month, and you're debt-free after a decade.
Lender C (SmartLend) costs more at $15,596 total due to its higher 9.5% fixed rate, despite having only a 1% origination fee. However, you still achieve debt freedom in 10 years with predictable payments of $129.97 per month.
Lender B (EduFlex Loans) presents the most complex scenario. The 15-year term means you'll be making payments for five additional years—a significant opportunity cost. In the best-case scenario, if the variable rate stays at 5.5%, you'll pay approximately $15,000 total. However, if rates climb to the maximum 12%, your total cost balloons to $22,032. Your monthly payments also range from $83.33-$122.40 per month. In total, that's a potential $7,000+ difference based on market conditions you cannot control.
The Opportunity Cost: Consider what you could do with those extra five years (years 11-15) of payments if you chose a 10-year loan instead. That money could go toward building an emergency fund, investing for retirement, saving for a down payment on a home, or pursuing other financial goals. The longer you're tied to debt payments, the less flexibility you have for other opportunities.
This comparison demonstrates why it's crucial to look beyond just the interest rate. The loan term, whether rates are fixed or variable, origination fees, and your personal financial situation all play crucial roles in determining the best option for your circumstances.
Consumer Protections and Borrower Rights
Federal student loans include nationwide borrower protections administered by the U.S. Department of Education. Private student loans are subject to lender contract terms and applicable state laws in addition to some broad federal legislation around lending.
Illinois residents benefit from additional protections under the Illinois Student Loan Servicing Rights Act while they reside in the state. Borrowers who move after graduation should be aware that state-level protections are different, even though loan terms remain the same.
Summary
Private student loans may help cover educational costs not met by other aid, but they come with fewer protections and greater long-term financial risk than federal student loans. Before borrowing:
- Exhaust federal and institutional aid options first
- Understand how your credit affects approval and cost
- Compare lenders carefully within a short application window
- Review borrower protections that apply in your state of residence
Making informed choices today can help reduce financial stress after leaving school.
References
AccessLex Institute. (n.d.). Student Aid Policy and Action Center. https://www.accesslex.org/tools-and-resources/student-aid-policy-and-action-center
Hanson, M. (2025, October 21). Total student loan debt in the United States. EducationData.org. https://educationdata.org/total-student-loan-debt
National Association of Student Financial Aid Administrators. (2024). You have questions, we have answers: Making sense of the student loan changes from OBBBA's RISE Committee. https://www.nasfaa.org/news-item/37700
StudentAid.gov. (2024). Big updates to federal student aid. U.S. Department of Education. https://studentaid.gov/announcements-events/big-updates
StudentAid.gov. (n.d.). Graduate PLUS loan credit check authorization. U.S. Department of Education. https://studentaid.gov/plus-app/grad/demo/credit-check-authorization
StudentAid.gov. (n.d.). Parent PLUS loan credit check authorization. U.S. Department of Education. https://studentaid.gov/plus-app/parent/demo/credit-check-authorization
StudentAid.gov. (n.d.). What to do if your PLUS loan is denied due to adverse credit. U.S. Department of Education. https://studentaid.gov/articles/plus-loans-denied-adverse-credit/
U.S. Department of Education. (2024). U.S. Department of Education concludes negotiated rulemaking session to implement One Big Beautiful Bill Act loan provisions. https://www.ed.gov/about/news/press-release
University of Illinois Chicago, Office of Student Financial Aid. (n.d.). Alternative loans. https://financialaid.uic.edu/types-of-aid/loans/alternative-loans/
University of Illinois Springfield, Office of Financial Aid. (n.d.). Private student loans. https://www.uis.edu/financial-aid/types-aid/loans/private-loans
University of Illinois System, Student Money Management Center. (n.d.). Know what you owe. https://paymybill.uillinois.edu/student_loans/know_what_you_owe
University of Illinois Urbana-Champaign, Office of Student Financial Aid. (n.d.). Alternative educational loans. https://osfa.illinois.edu/types-of-aid/loans/types-of-loans/alternative-educational-loans/
